StudentShare solutions
Triangle menu

The evience suggests that PPP hold both in the short and long run - Essay Example

Not dowloaded yet

Extract of sample
The evience suggests that PPP hold both in the short and long run

There is however some studies which focused on the short run basis of PPP. Chowdhry, Roll & Xia (2004) find that "relative PPP holds well in the short run in both single-country-pair OLS regressions and a pooled system regression" and that their evidence "for short-run relative PPP is unlikely to be driven by missing world factors or by real effects of inflation". Further, "our results complement the findings from the long-run PPP tests, and help resolve the PPP puzzle in the short run". They also have an evidence that "relative purchasing power parity holds quite well in the short run when inflation is extracted from stock prices". "For small differences in annual inflation between the United States and the country concerned, the correlation between relative inflation and depreciation in each of the years seems low. Relative PPP appears to "hold more closely for countries experiencing relatively high inflation" (Taylor & Taylor, 2004); "Finally, the IIRE is operative in both the short and long run in response to changes in the domestic price level" (Elwood & Fields, 1998). Based on those results, Click (1996), as mentioned by Fujiki & Kitamura in 2004 concludes that in "the time-series dimension, using the random-effects model, purchasing power parity holds, conditional upon the Balassa-Samuelson effect." Chapter 18 - Exchange Rate Theories discusses the favorable effect of PPP in the short run over long run. "PPP holds even in the short run within some blocks of nations"(Koedijk, Schotman and Van Dijk, 1998 quoted in Aggarwal & Simmon, 2002). "Short-run deviations from PPP are large and volatile" due to "financial factors such as changes in portfolio preferences, short-term asset price bubbles, and monetary shocks" (Rogoff, 1996).
The following references could also provide evidences of PPP in the short run.
CUMBY, ROBERT AND HUIZINGA, JOHN. "The Predictability of Real Exchange Rate
Changes in the Short and Long Run." Nat. Bureau Econ. Res. Working paper 3468, Oct. 1990.
Darby, Michael R. 1983. "Movements in Purchasing Power Parity: The Short and Long Runs,"
In The international transmission of inflation. Eds.: MICHAEL R. DARBY AND JAMES R. LOTHIAN ET AL. Chicago: U. of Chicago Press, Chicago, 1983, pp. 462-77.
Dornbusch, Rudiger. Exchange Rate Economics: Where Do We Stand,. Brookings Paper on
Economic Activity, 1, 1980, pp.143-85.
Dornbusch, Rudiger and Paul Krugman. 1976. "Flexible Exchange Rates in the Short Run."
Brookings Papers on Economic Activity. 1:3, pp. 537- 75
Dorodian, Khosrow; Jung, Chulho; Boyd, Roy. .Testing the Law of One Price Under the Fixed
And Flexible Exchange Rate System,. Applied Economics Letters, 6, 1999, pp. 613-6.
Frankel, Jeffrey A., (1976), "A Monetary Approach to the Exchange Rate," Scandinavian Journal of Economics, 78 (No. 2), pp. 200-224.
Frenkel, J. A. .Purchasing Power Parity: Doctrinal Perspective and Evidence from the 1920s,.
Journal of International Economics, 8, ...Show more

Summary

After review of many studies on the PPP, it has been noted that the studies and literature are generally focusing on finding evidences of PPP in the long run instead of short run for the following reasons: "it is generally accepted that PPP is unlikely to hold in the short-run due to various market frictions" (Dwyer, Fisher, Flavin & Lothian, 2005); PPP fails to hold more in short run than in long run (Amara & Murphy, 2005; Anorou, Braha & Ahmad, 2002; Culver & Papell, 1999; Caetano, Moura & Da Silva, 2004; DEUTSCHE BUNDESBANK, June 2004); "there can be substantial short-run deviations from PPP, but in the long run relative PPP holds remarkably well because fundamentals and arbitrage are domi…
Author : fkris
The evience suggests that PPP hold both in the short and long run essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"The evience suggests that PPP hold both in the short and long run"
with a personal 20% discount.
Grab the best paper

Related Essays

Long-run U.S. Economic Growth
An increase in economic growth is supposed to raise the average standard of living of the people. While studying economic growth theory, it is important to differentiate between short term and long term ups and downs. Potential GDP in a nation is determined by the aggregate labor, capital and technology available and is often identified as the long term growth (Taylor, 125).
20 pages (5000 words) Essay
Explain why Perfectly Competitive Industries are Considered to be Efficient in the Short and Long-Run
However, there are opposing opinions to create unrest. According to George Watson, “Monopoly favors the rich (on the whole) just as competition (on the whole) favors the poor.” (Fitzgerald, 1988) On the one hand, the economist voice about perfect competition and on the other, monopoly is talked upon.
6 pages (1500 words) Essay
Production in the Long Run
Most manufacturing companies fall under this class, for example, the motor vehicle industry and DVD players. In total product, it is difficult to measure the amount of output. With the average product, the total output divided by the output per capital employed.
8 pages (2000 words) Essay
Explain the main determinants of exchange rate behavior in the long run and in the short run. In the context of your analysis di
Though foreign currency could be accessed in other forms such as exports and maybe in the tourism sector, the foreign exchange market has withstood the test of time as being the best and easiest way to acquire foreign currency. However, this market has been observed to be among the most volatile markets in the world.
8 pages (2000 words) Essay
Short-run Phillips curve & the long-run Phillips curve
Short-run Phillips curve & the long-run Phillips curve How do active and passive views of these concepts differ? The Philips Curves are fundamental to the study of economics. The Curves represent the relationship between inflation and unemployment rates and, they have cross relationships with aggregate supply curves.
3 pages (750 words) Essay
Application of PPP in the Short Run
Thanks to globalization of trade, the prices of goods and services in the market are being driven by the global prices. Globalization has allowed for stiff competition in the market which has led to people choosing the best prices of goods. As result, people who sell their goods at extremely high prices have been forced to tone down by the market forces reading to creation of uniform prices of goods.
7 pages (1750 words) Essay
Affect of Interest rate on Equilibrium in Short and Long Run
Long run is defined as the period of time when all factors of production are variable in supply. There can be lot of variables in the long run that might need to be considered, but for current assignment let us look at the affect of Interest rate in the long run.
2 pages (500 words) Essay
Businesses in the Long-run
The business may successfully make short-run production plans that can only be accomplished within a particular size of the industry. However, in the long-run, production may be increased and the cost of production decreased by expanding the size of the industry.
6 pages (1500 words) Essay
The evience suggests that PPP hold both in the short and long run
due to various market frictions” (Dwyer, Fisher, Flavin & Lothian, 2005); PPP fails to hold more in short run than in long run (Amara & Murphy, 2005; Anorou, Braha & Ahmad, 2002; Culver & Papell, 1999; Caetano, Moura & Da Silva, 2004; DEUTSCHE BUNDESBANK, June 2004); “there
3 pages (750 words) Essay
Using a simple supply and demand framework, analyse the potential factors that impact on the price of crude oil in both the short- and long-run
At the same point in time, due to the high levels of crude oil demanded, producers raise their levels of production so as to maximise on the returns being derived from the sales of crude oil. Below is a graphical illustration of the behaviour of demand and
5 pages (1250 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation